Clear Eyed Capitalist

Archive for November, 2010

The spouse pointed me to an interesting site: Kickstarter. It’s crowd-sourced project funding for creative projects: film, theatre, art, design… stuff like that. You can search by city or by project type to find projects you want to help fund. The site creators are very explicit that this is NOT an investment, the creator retains 100% of the rights to their work. It’s also not a donation, unless the creator is a 501c3, but they don’t want the site used for fundraising – it has to be about funding projects. It seems to me it has to come under the auspices of a sale. The project creator defines “reward levels”, very much public-radio style – this level you get a CD, this level you get the CD and a t-shirt, etc.

The site creators seem to work pretty hard to leave the tax status at the risk of the project creator – the site uses the terms “promise” and “reward”. Most of the projects are raising a couple thousand dollars or less, so this seems to be flying on the “nobody complains, nobody gets hurt” theory. The way it makes sense to me is as a pre-sale of product or experience, but the artist/project person would need to be paying sales taxes. The closest the site comes to a suggestion of that’s how it should be viewed is in their FAQ, if the person is unable to complete their project as listed… “If you fundamentally change your project, are unable to fulfill the promises made to backers, or decide to abandon the project for any reason, you are expected to cancel funding. A failure to do so could result in damage to your reputation or even legal action on behalf of your backers.” Your backers, IE your customers, could take you to small claims court. But who is going to do that for $25? If you’re pledging more, hopefully it’s because you know the person. On the couple projects I browsed it looked that way, an organized way to raise money from your friends and family. The FAQ suggests backers “use your internet street smarts”.

People do this kind of thing informally all the time – help each other out, support friends doing a cool project, it’s the informal economy. So it’s interesting to watch us use the web to formalize it. On one had it’s improved – more transparency and a little more accountability – the projects are set up that backers make a pledge and the funds are charged and transferred only if the funding target is hit. It’s pretty loose though – it’ s up to the project funder to post a budget or not, and they’ll let projects “overfund” if they can within the originally allotted time. I find that a little disconcerting – it encourages people to under-budget so the can effectively break escrow, but then keep fundraising. Project creators post updates about their projects and can choose to make them visible only to backers. Some of the rewards are fun – tickets to an opening, or in two projects the creator offers to make dinner for backers at that level! The opportunity to make new connections seems like a great one. At least one place on the site used the word “patronage”. However the downside of formalizing the informal economy is it creates sticky questions around things like tax status and regulations – to some extent these things are done informally because they’re just too small to bear the overhead of compliance. Often taxes formally exempt projects below a certain amount, but it’s very local jurisdictional.

We looked at a couple projects that seemed like products effectively fundraising via pre-sale. That seems really cool because you can effectively demonstrate market demand before you manufacture the product. The question remains, can you follow through? That’s where it gets tricky. For a $5000 project it’s probably not the end of the world. For $500,000 projects maybe there’s a way to pair this mechanism with something more formal that could do deeper due diligence on the team and the project.